MSCi rebalancing fuels foreign selloff

Last week, MSCI finally completed the last tranche of its rebalancing exercise. MSCI is the world’s leading index provider and is widely followed by foreign funds and institutions. In fact, most foreign funds and ETFs benchmark themselves to MSCI indices. Thus, all eyes were on MSCI when it announced on Feb. 28 of this year that it will be increasing the inclusion factor of China A-shares in its indices in three steps. By its conclusion, 253 large cap and 168 mid cap China A-shares were added to the MSCI Emerging Markets (EM) index. As a result, China’s total weight in the

EM index is now 33.6 percent.

Last day sale, last minute selling

On Nov. 26, the last day for rebalancing, huge volumes were transacted in the last minute of active trading. In fact, most of the volume happened at the last second of the pre-close auction. Gross foreign selling on Nov. 26 amounted to a whopping P19.2 billion. Moreover, that day also saw one of the largest value traded for the Philippine stock market this year at P21.2 billion, compared with this year’s average daily volume of P4.5 billion. We also saw one of the biggest net foreign selling in a single day at P4.8 billion.

More for China, less for everyone else

The consequence of the inclusion of China A-shares is the reduction in weight of every other member of the MSCI EM index, from the largest members such as South Korea, Taiwan, India and Brazil, to the less significant ones, such as the Philippines. Given the wide following of MSCI, the Philippine stock market experienced heavy foreign selling during the three rebalancing periods on May, August and November. All of the selling we saw is actually to purchase China stocks, at the expense of other emerging markets.

AGI and DMC removed from MSCI Philippines index

Another effect of the rebalancing was a decrease in the percentile rank of companies with lower than average market capitalization. If a company’s rank falls below a certain percentile, they may be removed from a country’s benchmark index. Unfortunately, with the entry of more than 400 Chinese companies into the MSCI EM index, it was announced on Nov. 8 that both AGI and DMC were deleted from the MSCI Philippines index.

Share buybacks and major shareholder purchases cushion the drop

The two stocks that dropped the most since MSCI’s announcement were DMC and JFC, which both lost 18.5 percent since Nov. 8. While DMC suffered because of its deletion, JFC’s drop was largely because of a negative earnings report. Note also that despite AGI’s deletion, it fell far less than its peers. This is because of its very large share buyback program. Other than AGI, other MSCI Philippines stocks which saw significant buybacks or controlling shareholder purchases are ALI, DMC and ICT.